During your search for an apartment you can afford, you've likely stumbled on this nugget of wisdom: You shouldn't spend more than 30 percent of your gross (pre-tax) income on rent. But is it wise? That depends.
While housing is likely your single biggest expense, there are a few other ways to look at how much you should spend on rent that might be more helpful.
What is the 30 percent rule?
The rule stems from the Brooke Amendment, a 1969 U.S. Housing and Urban Development Act that capped rent in public housing projects at 25 percent of a tenant's income. The cap increased to 30 percent in 1981. The idea that you shouldn't spend more than 30 percent of your income on rent stuck, and the “rule" was born.
The rule also became a mantra for homebuyers seeking mortgages. Many lenders use a 28 percent housing expense-to-income and a 36 percent housing expense plus debt-to-income ratio for mortgage qualification.
Also, when landlords consider a renter's application, they typically want to see that your gross income is three times the rent amount.
Following the 30 percent rule for rent would mean that if your gross income is $42,000, you shouldn't pay more than $1,050 a month. But what if you're in San Francisco? That wouldn't get you a spot in a dresser drawer in that city, where the average monthly rent for a one-bedroom apartment is $3,137. Your gross annual income would need to hit $125,480 if you were following the rule.
There are other factors to consider and other ways to look at how much money to spend on rent.
7 reasons you may want to ignore the 30 percent rule
The 30 percent rule has good intentions, but it's not a one-size-fits-all. As Harvard's Joint Center for Housing Studies puts it, "A household making $30,000 annually would have $1,750 in income left over each month if they devoted 30 percent of their income toward housing, while one earning $15,000 would have half that amount. Since it is conceivable that higher-income households can spend more than 30 percent of income on housing and not be financially burdened, there is concern that the 30-percent standard may overestimate housing affordability problems for higher-income households."
You have to live somewhere, and rent is just one of many expenses you're responsible for each month. Look at your overall spending; there are probably trade-offs you can make to swing an apartment that will eat up slightly more of your paycheck.
1. You're determined to live close to work
In a city like Boston where drivers lose 149 hours a year to traffic congestion, according to the data firm INRIX, you might be willing to pay more for an apartment near your job.
2. You've dumped your car
And if you live close enough to work, you might be able to get by without wheels. No shelling out for car payments, insurance, gas, and maintenance might give you enough dough to afford higher rent. You could walk, cycle or take public transportation to work.
3. Basic amenities are covered
If your rent includes cable, internet, laundry, utilities and parking — in other words, all those things you'd have to pay “extra" for anyway, bundling them into your rent makes sense.
4. Special amenities are also covered
So, you're a gym rat. The average annual cost to belong to a national gym chain is around $500, according to RunRepeat. You might spend more to live in an apartment building that has a fitness center for its residents.
5. It's just not possible where you live
Think San Francisco, Chicago, Boston, Manhattan, Washington, D.C. — the usual suspects. Average rents may have dropped during the pandemic, but they will likely jump again. You might consider spending slightly more than 30 percent; your salary may rise.
6. You're making good money
If you've got a secure, great-paying job and little to no debt, you might consider spending more of your monthly income to rent something luxe.
7. Your income really tips the scale
And if you're making really good money, let's say $300,000, the 30 percent rule would mean you could spend $7,500 a month on rent. Spending that much on rent might be irresponsible — perhaps it's time to buy a house or condo.
Why the 30 percent rule is outdated
Things have changed quite a bit since 1981 when the 30 percent rule became more widely known. Ya think?
People's paychecks divvied up differently. First of all, most people didn't have monster student loans. Today, there are about 43 million Americans (one in eight) carrying student loan debt. The average student loan is about $30,000, making the average monthly payment around $393; although, depending on a host of factors — the type of degree you got, where you went to school, etc. — you could be paying way more.
People also weren't saving for retirement in the same ways in 1981 as they are today — 401(k) plans were just beginning to gain traction.
And, in the early '80s, medical costs and health insurance were beginning to become more of a burden on individuals. New ways of paying for insurance came into play during this time.
When it comes to rent affordability, everybody has different circumstances. What if you've got children or a non-earning spouse? Alimony? Child support? Eldercare? The 30 percent rule is a good guide, but determining what you can actually afford is a tricky balance. You don't want to go too far above that percentage. Doing so may create a true cost burden that will affect your ability to afford necessities like food, medical care and transportation.
Alternatives to the 30 percent rule
There are some other ways to figure out how much you should spend on rent each month and still get the occasional iced mocha cappuccino.
A personal budget
Who looks at their gross dollar amount when thinking about how much to spend on rent or anything else? It's your net — what's written on your actual pay stub after your taxes, health insurance, retirement funds, flexible spending account, etc. — that you should consider. When developing your own budget…
- Figure out how much you can afford in rent by thinking seriously about your must-haves, your lifestyle, your financial obligations
- Take time to track your spending; three months' worth is a good barometer
- Remember to pay more than the monthly minimum on any credit card debt
- Look for savings on things like car insurance, cable costs, groceries
- Use one of the many free online budgeting tools. You can connect all of your financial accounts so you get the big picture.
The 50/20/30 rule
Popularized by Elizabeth Warren in her book "All Your Worth: The Ultimate Lifetime Money Plan," the rule encourages you to divvy up your after-tax income this way:
- 50 percent for living expenses and essentials rent, utilities, groceries, transportation
- 20 percent for savings, investments, debt reduction (such as credit card payments)
- 30 percent for things you want rather than need — travel, dining out, entertainment, hobbies
Monitor your spending for a few months to see what money you have to work with. This will work if you're self-employed, but if your monthly income is erratic, it may take you longer to get all the information you need.
What's good about 50/20/30 is its flexibility; you can play around with the numbers to individualize it and make it work for you.
The 80/20 rule
If you're not into budgets, this is an easier way to go. It's a simplified 50/20/30 rule that stipulates that you prioritize savings overspending. No categories required.
- 20 percent of your income goes to savings
- 80 percent of your income is for all the other stuff
What does savings mean? Money for retirement (long-term) as well as emergency funds (unexpected needs).
If you want to get fancy, you can divide the other 80 percent up by needs (food, clothing, shelter) and wants (toys, travel, entertainment, etc.).
The 80/20 method is simple and flexible. But if you need more structure, this method won't work for you.
Some people are more tactile and visual than others. Cashing your paycheck and physically putting money into various envelopes labeled by expense can help you see exactly how much you need and have leftover each month.
Try a rent calculator
Once you've figured out a budget, use a rent calculator to help determine how much rent you can afford on your salary. The calculator will consider which city or town you want to live in, the type of space you want and your annual household income to come up with a decent ballpark figure.
Not just about needs
Whichever budget you decide to go with and whichever way you determine how much rent you can afford, remember that you've got to follow the path you've set up. You can always revisit your budget.
Make it easier on yourself by creating automatic payments, setting reminders, using different accounts for your various buckets. But don't forget to give yourself an allowance. A budget cannot be solely about needs. Once you've found a place to live, make sure you've got extra to help you live a little.